Survey Sees Growth Tied To Rate Decreases

November 18, 1995|By Dave Ahearn, Bloomberg Business News.

WASHINGTON — U.S. economic growth will slow to a 2.4 percent yearly pace in the October-December quarter from a 4.2 percent rate in the previous three months, a National Association of Business Economists survey suggests.

The NABE survey sees the nation's output of goods and services growing 2.6 percent next year, which it called a sustainable pace that won't force wages or prices to jump.

"The outlook for inflation is favorable," with retail prices next year rising about the same as the estimated 2.9 percent increase NABE sees for this year, the survey said.

That should leave room for the Federal Reserve to continue lowering interest rates next year, NABE said. The survey sees the three-month Treasury bill rate declining to an average of 5.1 percent in 1996 from a projected average of 5.5 percent in 1995. Currently, the three-month bill rate is 5.52 percent, up from a low in September of 5.33 percent.

Analysts expect the central bank to cut rates in 1996, and NABE members agree. Its projection of lower T-bill rates "implies some easing of monetary policy over the next twelve months as the Fed realizes that economic growth is not excessive and therefore is not creating inflationary pressures," NABE concluded in a summary of the survey of 41 economists.

NABE also sees a decrease in long-term interest rates. The yield on the benchmark 30-year Treasury bond will decline to an average 6.4 percent for all of next year from an estimated 6.9 percent this year, it said. The bond was yielding 6.29 percent today.

A separate NABE survey showed many business economists aren't concerned that the Federal Reserve is holding interest rates steady, even as the economy decelerates.

Some 63 percent of the 166 NABE economists in the survey said the Fed's conduct of monetary policy is "about right." At the same time, 33 percent said this month the Fed's policy stance is "too restrictive," up from 29 percent in August and 14 percent in May.

NABE said 55 percent of the economists expect short-term interest rates to decline over the next six months by 26 to 50 basis points. A basis point is one-hundredth of a percentage point.

Interest rates might decline further if the federal government agrees on a plan to balance its budget, the economists said. That, they said, could push interest rates a full percentage point below where they otherwise would be. The NABE panel also said it expects "the value of the dollar to rise after a viable balanced budget agreement is reached."

Those benefits may not be realized soon, however. President Clinton and congressional Republicans are at loggerheads over how to balance the budget, and the government is closing some agencies for lack of funds to keep them open.

One politically painless plan to reduce federal budget deficits wouldn't involve changing current budget or tax law. Instead, some Republicans want to see the Department of Labor change the consumer price index so it shows less inflation.

That change would have the effect of reducing cost-of-living increases for people receiving government benefits, while also cutting the inflation adjustment to income tax brackets so the government collects more revenue. Thus, cutting the CPI figure would also cut the federal budget deficit.

The proposal drew backing from NABE members, 65 percent of whom said the consumer price index overstates inflation by 0.6 to 0.8 percentage points. Two out of three of those economists says the Labor Department should improve its measurement of the CPI. Some 60 percent of the analysts favor a flat 1 percentage point reduction in the index. At the same time, just 28 percent of the economists said they expect Congress to mandate the reduction.

In a more general view by the analysts, the survey said the nation's most serious economic problem is "the growing inequality in the distribution of income," as the gap between rich and poor widens.